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Maintaining Control in the Dairy Industry

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Greg Steele
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Those of us connected to the dairy industry can’t deny that we are facing challenging economic times. 2017 marked the third consecutive year of shrinking profit margins. To make matters worse, Dairy producers across the regions are reeling after they have received 2018 milk checks that are much lower then what they have seen since the downturn back in 2009. The reality is that they have significantly less revenue to manage their business with.  However, in almost any downturn, there are a handful of strategies that we encourage producers to embrace in order to yield results. Honing in on the areas of your operation that you control is a great starting point.

Reliable Financials. I am repeatedly asked by producers I work with, what they can be doing in order to positively impact their business. And I always respond by encouraging them to focus time and energy on ensuring that they have a reliable set of accrual financials for their business. Having reliable financials will allow any producer the ability to closely monitor the actual performance of their business. There is extreme value in being able to monitor your numbers against the budget forecast, especially in the coming months with anticipated shortfalls in cash flow.

With the second half of the year still ahead of us, dairy producers who started the year off with working capital stored on their balance sheet, are at an advantage. Once that working capital is depleted, or you didn’t have that bucket to dip into – tapping into your line of credit is another option. During this extended period of low prices, I would encourage you to also work closely with your lender, you may be able to gain access to working capital lower down on your balance sheet you may not realize you had available. In addition, through refinancing real estate loans or taking out cash could act as supplement working capital. However, keep in mind that this is only a viable option if there is adequate equity in real estate assets to support additional debt, and more importantly it would cash flow.

Cost control - Dairy production is a commodity business and the practice of intense cost control can reap significant benefits, regardless of where the revenue falls. Solid levels of efficiency and productivity are more critical than ever. Knowing and understanding your cost in all expense areas on a per cwt basis is a must. Being able to evaluate cost on a per unit basis provides additional insights into where your business’s strengths or weaknesses are. It will help highlight where the focus should be to result in the highest profit impact.

Increase Market Knowledge. One thing that has become predictable in the dairy industry, is the volatility of prices and expenses. The dairy industry has known the threat of tariffs was a possibility since early in the year when just a short time ago when Class III prices were trading at $17 but unfortunately few producers took advantage. Producers need to have a plan and strategy in place that they can act on in order to capture margins when they present themselves because those opportunities are short lived given the current market dynamics. With the prices being what they are today, it doesn’t leave much opportunity to turn a profit. However, I encourage producers to take the time during the downturn to work closely with business consultants and marketing advisors to better understand emerging opportunities that you can take advantage of.

Keep your lender informed. I cannot stress enough, the importance of maintaining strong communication with your agriculture lender. Often times they are able to provide you with insights, tools and resources to assist you in effectively managing your Ag financials. I welcome the opportunity to have candid discussions with my clients. By having those conversations ahead of time, we can be proactive in identifying solutions tailored to your specific needs, and by discussing these options in advance, it may result in you having more avenues to choose from.

By becoming a student of your own business throughout these trying times, not only will it help you survive, but your operation with be strengthened in order to benefit fully when the next round of high prices come around.

Nobody in the industry looks forward to a period of tight margins, especially after experiencing consecutive years of low dairy prices. However, I urge for you not to get bogged down with self-pity or placing blame. The success of your business depends on what tactics you can adopt to improve your operation and its’ financial returns. By building strong financial records, honing in on controlling your costs, educating yourself on market conditions, and maintaining open communication with your lender, you will have the tools necessary to survive this downturn.
 
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